Monday, January 14, 2008

UT Investments and ROI

During the last few weeks, I mostly recapped the 2007 company/stock performance and the 2008 hopes/expectations. For this post, I would like to address an "intangible asset" that most do not focus on but has benefited UT and I think can bring more value in the future. This is their ability to invest in companies in emerging countries and technologies.

Yahoo's Alibaba and EMC's VMware holdings are well publicized. For those that remember a while back, Apple's holding of ARM holdings allowed it to accumulate literally hundreds of millions during their critical turnaround phase. Another shareholder, Tigre, posted a detailed history of UTs joint holdings with Softbank that could have yielded $570m instead of $57m since they owned part of Alibaba. Its a very good read, which is why I wanted to archive it.

UT invested in gemdale and infinera that are now worth about $100m and have become material that we actually track the day to day value of gemdale in Yuan (its back to 49 yuan btw:-). Another holding in Fiberxon was replaced with MRVC when they bought Fiberxon. From last quarter's filing,

"On July 1, 2007, Fiberxon, an investment in which the Company had a 7% ownership interest, completed a merger with MRV Communications ("MRV"), which is a publicly-traded company. In exchange for the Company's interest in Fiberxon, the Company was entitled to receive $1.5 million in cash, 1,519,365 shares of MRV common stock valued at approximately $4.5 million and deferred consideration of approximately $2.7 million. The deferred consideration becomes payable upon the completion of certain milestones and may be reduced by legitimate claims of MRV for certain matters related to the merger. In the third quarter of 2007, the Company was paid the cash consideration of $1.5 million and received 1,519,365 shares of MRV common stock and recognized a gain on investment of $2.9 million. The Company also recorded an unrealized loss of $0.7 million representing the change in fair value of the investment during the third quarter of 2007."

Here is a current PR from a MRV subsidiary that will have an ipo.

The investment gains from the $57m a couple of years ago to todays gemdale/infinera/MRVC has shown that UT connections and doing business in emerging countries/technologies are valuable "assets" that needs to be kept up and pursued. Some could even say that UT failed to take advantage of the growth in these emerging markets by failing to partner with other Chinese companies and have losses in their investments in 3com (although they have a lawsuit with Starent and have some patents).

Overall, management continues to spend a lot of money in R&D, SG&A and are not getting a good ROI for the dollars spent. I am not saying that the company needs to become a mutual/hedge fund but they have connections/resources and can leverage their position to take advantage of unique opportunites not available to other foreign companies or even other funds. Management should do a much better job in evaluating the best use of their limited resource to get the best ROI. Other shareholders have been calling for a stock buyback. Obviously, the convertible bond is a priority but a stock buyback should be seriously considered and if management is to enhance shareholder value, they need to buy back some shares at these prices. This is another reason why the street is discounting the stock. Instead of giving the company credit for being in emerging markets and being in a position to take advantage of early trends and growth opportunities, the street looks at managements lack of pro-shareholder actions.

As a last commentary, Juniper's COO leaves the company and the stock tanks. Openwave's CFO leaves and the stock tanks. When Lu announced he was retiring, the stock doesn't do anything and people question why he is not leaving right away. When Sophie left, most people were relieved and wondered why he was even promoted to COO in the first place. If Barton leaves, he will receive a nice farewell gift to adequately compensate him for his poor forecasts and lack of communication for over a year. When the star player of a last place sports team leaves, everyone is relieved so that they can start the turnaround sooner and get rid of his/her salary. Why pay millions for bad management? I like Barton personally and have high hopes for Blackmore but the company and stock performance has been atrocious. During the shareholder meeting and recent CC, management made it a point to discuss shareholder value and to expect improvements. Drastic improvements are needed and I still have hope but we will just have to see.

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